Business Loan vs Microloans

Difference Between Microloans & Business Loans

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03 Sept 2020
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Introduction

Nowadays, businesses have various business funding options available, which include Non-Banking Financial Corporation (NBFCs), banks, schemes by the government, and equity & crowdfunding. Among the multiple options available for small businesses, choosing the right tool for funding is a tough task. It is essential to know several things such as analyzing your store, your business requirements and your capacity to repay the loan. Finding ways to avail business financing is one of the biggest challenges that business owners face. Almost all the choices of obtaining the best business loan are one that takes proper planning. Before making significant plans, the question is whether to opt for a business loan or a microloan. Let's first understand the terms for both the loans.

What is a Business Loan?

Business loans are unsecured types of loans that offer financial assistance for businesses. Banks and NBFCs in India provide this loan. The primary aim of a commercial loan is to support the urgent needs of a growing business. Most lending institutions offer term loans and Flexi loans to cater to the requirements of a company. All types of companies like a sole proprietorship, privately held companies, partnership firms, self-employed individuals and retail business owners can avail these loans.

Also read what are the benefits of business loan online at Finserv MARKETS

What are Microloans?

Microloans are small amount loans that are usually offered by organizations whose aim is to encourage small business owners. The sole purpose of this loan is to help the small scale industries who are not eligible for a conventional loan for business to get the required financing. This loan requires less paperwork and proofs as compared to business loans. Microloans have played a significant role in the success of the small business as 70% of the industry in India is small & medium scale enterprises. This loan carries a higher rate of interest because they are typically much riskier than other lending options.

Difference Between Microloan and Business Loan

 

Micro Loan

Business Loan

Loan Amount

●      Microloans are generally a small amount of credit (up to Rs. 1 Lakh), whereas loans for business can range from a small amount for a short tenor to no small amount of loan for a long tenor.

 

●      When the requirement is for the small loan amount, one should go with microloans as they are quickly approved as compared with the business loans.

 

●      One of the main differences between a Business loan and a microloan is the loan amount that can be approved on the loans.

 

●      Depending upon the financial requirement of your business, you can avail loans of up to ₹30 Lakhs to ₹50 Lakhs can be availed from banks & NBFC.

Interest Rates

●      Microloans tend to have higher interest rates than loans for business comparatively. One reason is that these loans are considered to be short-term loans, while traditional commercial loans are primarily considered to be long-term loans.

 

●      Since most microloan lenders are non-profit organizations, they have to be able to raise funds for the organization this way.

●      The reason behind the higher interest rates charged on microloans is the fact that the guidelines are stricter for business loans.

 

●      Typical interest rates range from 8% to 16%, while traditional commercial loan interest rates may range from 5% to 9%.

 

Use of Funds

●      One more difference between a microloan and commercial loan is the use of funds. microloan lenders may not agree with businesses paying off debts with the funds.

 

●      The loan funds have to be used specifically for business operations such as rent, salaries, equipment purchases, and supply purchases.

 

●      Some financial institutions may allow the business to use the funds for any purpose related to the company, including paying off other business-related debts.

If you are planning on getting a loan for your business, you can apply for it with Finserv MARKETS. Getting a Business Loan is quite natural for small businesses to help them to reach their full potential. The loans from Bajaj Finance are collateral-free, and all the business finance offers is designed to help SMEs reach new heights. The loan disbursement process is quicker, and the loan amount gets credited directly in the borrower's bank account within a few working days after approval.

Offering flexible loan repayment tenure, the loan can be repaid quickly through easy monthly instalments. These loans for small businesses provide momentum to the growing small businesses. You can download the Finserv MARKETS App online and get access to quick financing for your business. Before applying for an SME loan, it is best to check with your loan eligibility and credit score check. Also, get a detailed Financial Health Check Report (FHCR) for free, ensuring your loan eligibility and make the complete loan approval process quicker and more comfortable.

Also, look for MSME Loan scheme 2020 and read on how to apply for the scheme only at Finserv MARKETS

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